Opportunity Knocks: Reforming the Dominican Republic’s Energy Sector

The DR’s National Energy Commission leads by example using Net Metering to reduce monthly bills. This solution also provides surplus renewable energy to the grid, reducing the country’s total amount of fossil fuel-based energy.

Since October 2012, the energy sector in the Dominican Republic has been in the spotlight as a result of President Danilo Medina’s efforts to deal with the country’s larger fiscal crisis. Over the years, decisions made within the sector have led to an unsustainable level of debt, poorly maintained infrastructure, and a reliance on fossil fuels that, in 2010, cost the government US$2.6 billion.

With all of this attention, the opportunity exists to overhaul the floundering electricity sector and bring it in line with the country’s vision of a sustainable future. The Dominican Republic has a stated goal of obtaining 25 percent of its energy from renewable sources by 2025. And at the recent United Nations climate talks in Doha, Qatar, Mr. Omar Ramirez, Executive Vice-President of the Dominican National Council for Climate Change and the Clean Development Mechanism (CNCCMDL), said the country will reduce its carbon emissions 25 percent from 2012 levels by 2030.

These are ambitious targets for a country that relies on fossil fuels for more than 90 percent of its primary energy. But they can be achieved if decision makers seize this moment and embrace new thinking. It will not be enough to just add more generating capacity to the mix. Real reform will come when subsidies not longer hide the true cost of fossil fuel use, when renewable energy promotion is prioritized, and when energy sector agencies are structured in a way that provides transparency and accountability and is in line with stated long-term energy goals.

Solving the electricity sector’s debt challenge

The largest opportunity seems to be in dealing with the electricity sector’s current fiscal deficit (the subject of a related post last November). The sector’s soaring debt stems in large part from the government’s use of a convoluted formula to determine electricity rates, rather than simply charging a rate that is indexed to the cost of the fuel used to generate the electricity (the former being less expensive than the latter) and subsidizing the difference.

A 2012 report from the Inter-American Development Bank (IDB), Analysis of the Current Situation of the Dominican Republic’s Electricity Sector, addressed this exact issue and recommended that the government change the pricing mechanism to one that is indexed to the actual cost of fuel. It also recommended that large consumers pay a single rate for total consumption.

Right now, energy consumers in the Dominican Republic are divided into different categories (e.g., residential, small business, large business, industrial, etc.). Within those categories, customers pay varying rates for various levels of consumption (e.g., RD$3 for every kilowatt-hour between 0 to 200, $5 for every kWh between 200 to 300, etc.). Revising this scheme would help reveal the true cost of consumption and address fiscal challenges in the electricity sector.

In addition to internal fiscal issues, the Dominican government faces a US$2 billion debt to Venezuela as a result of the regional Petrocaribe agreement. The government buys oil at a favorable price and receives a drastically low interest rate and a very long period of time to finance the oil it can’t afford up front. However, given the current uncertainty in Caracas, some in Santo Domingo fear that the loan will be called early, the inexpensive solution will disappear, and the country will not be able to afford its energy import needs.

Prioritizing renewable energy

The Dominican government also has to the opportunity to truly put renewable energy at the heart of all future planning. It has already put in place some strong mechanisms to promote renewables growth, but it is currently not utilizing them to their potential.

In 2011, the government implemented a net metering provision that allows customers to take advantage of solar photovoltaic (PV) technology to help reduce their electricity bills. The country also passed a very strong law to incentivize the growth of renewable energy: the law waives import duties for renewable energy equipment, allows for the writing off of 75 percent of sales tax on electricity sales from renewable sources for 10 years, and makes the tax on equipment deductible up to 75 percent for that same period.

Sadly, however, decision makers are reverting to choices that only entrench the country’s fossil fuel dependence. The government chose to remove the aforementioned fiscal incentives to collect more revenue. After serious backlash, they settled on reducing the sales tax write-off from 75 percent to 40 percent. Another questionable move is the government’s decision to install 1,200 megawatts of new coal-fired generation to replace an equal amount of outdated fuel-oil generating capacity. The government is also considering exploration of the island and the surrounding waters for oil and gas resources it might be able to exploit.

Instead of gutting renewable energy support, the Dominican government should be strengthening the mechanisms that promote a cleaner, more sustainable, and more independent energy sector. It should also direct more support to expanding the financial sector’s ability to underwrite large-scale projects. Right now, funding for renewable projects is limited to a pool of money that supports smaller projects with payback windows of only five to seven years.

Instead of taking steps that keep the country overly reliant on dirty fuel sources—and bringing associated health and environmental costs that will be more costly in the future—the govenment should be taking larger steps to make it easier to capitalize on the abundant renewable resources it already has.

As the Worldwatch Institute pointed out in its initial Sustainable Energy Roadmap assessment of the country, the Dominican Republic has very strong solar resources, comparable to the U.S. southwest. Given high transmission losses and the scale of the country’s two largest load centers (Santo Domingo and Santiago), solar PV could see tremendous success in bringing more affordable electricity to consumers and reducing the amount of electricity—and by extension, fuel—necessary to meet customer demand.

Electricity sector reform

Lastly, the Dominican government has a great chance to significantly reform the electricity sector. It has a chance to bring some much-needed coordination to a sector that currently comprises various autonomous actors. The closest thing the government has to a leadership agency is the state-owned utility, Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE). However, the Superintendencia de Electridad (SIE) and the Comisión Nacional de Energía (CNE) are supposed to make recommendations that agencies like CDEEE are meant to follow, but there is no mechanism for enforcement. In addition, all actors must make sure their decisions are in line with the CNCCMDL. This lack of defined leadership leads to a lot of confusion.

Legislation is currently being formed that would create a Ministry of Energy and Mining. The administration and the National Congress have produced their respective drafts, which are now being reconciled and merged into one document. Such a ministry could bring a more regulated structure and a uniform set of laws to which all agencies are accountable.

If this new ministry were to form, however, it is hard to say what the impact of any previous recommendations might be. The 2012 IDB report was created in the context described above—many actors without a single set of rules to coordinate them. But, since it appears that the government is trying to better organize things, it has a great opportunity to ensure that renewable energy receives stronger consideration and preference than it has in the past.

Up until now, CNE has been responsible for making recommendations to support and foster the growth of renewables. But that is where its authority ends. There is no real mechanism to ensure that its recommendations are prioritized or implemented. A strong mandate for an energy ministry could change all of that.

But it is hard to say if that is even part of the discussion. The proposed energy ministry legislation is not available to the public. Since the energy aspect will be combined with the mining activities of the country, there is uncertainty over which of the two will have more influence on the final legislation. In addition to major reforms, a much more open and transparent process to ensure alignment with future energy goals is needed—and right now, that element is sorely missing.

A new future needs new solutions

In the haste to solve a pressing crisis, it is easy to see how decision makers will opt for an expedient and familiar solution: focus on the bottom line, add more capacity as cheaply as possible, and bring down prices immediately. These are not bad ends in themselves, but it could end up costing the country even more in the long run if all they are doing is papering over the problems of a broken system.

What they should be doing is taking a longer-term approach that is in line with the vision and political will they have shown in the past for implementing more-sustainable and lasting solutions (i.e., net metering, Renewable Energy Support Law, etc.). As Worldwatch is finding in its continued Sustainable Energy Roadmap work, these solutions exist, and now is the time to implement them.